SAVILLS (HONG KONG) LTD v. KIT WANG GROUP (CHINA) LTD

HCA 1779/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1779 OF 2014

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REASONS FOR DECISION
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1.  This was an appeal by the defendant from an order of Master S Kwang dated 23 March 2015 granting summary judgment to the plaintiff.  At the conclusion of the hearing the appeal was dismissed with costs.  My reasons appear below.

Compliance with Practice Direction 5.4 — filing and service of skeleton argument

2.  As a preliminary matter, the defendant’s non-compliance with the requirements of §11 of Practice Direction 5.4 (“PD 5.4”) calls for comment.  Parties need to be disabused of the notion that compliance with Practice Directions is not required.

3.  In the present case, the defendant was legally represented. The fault therefore lies with its legal representatives.  Counsel’s skeleton should have been filed and served by 10 am on Monday, 17 August 2015 but it was not lodged until about 4 pm on Tuesday, 18 August 2015.  Ostensibly, the defendant’s solicitors were awaiting confirmation of instructions from their client.

4.  Meanwhile, notwithstanding non-receipt of the defendant’s skeleton, the plaintiff lodged its skeleton on 18 August 2015 pursuant to PD 5.4.

5.  It subsequently transpired that the defendant’s solicitors were in physical possession of counsel’s skeleton on 17 August 2015.  Nevertheless, they saw fit to withhold counsel’s skeleton from the court and the plaintiff because they had not yet received payment on account by the defendant.

6.  As counsel would not have prepared his written skeleton without having been briefed, the defendant’s solicitors’ conduct is wholly unacceptable and is to be deplored.  The fact that the firm had not been put in funds is a matter between the firm and its client and is not a valid reason for withholding the skeleton and failing to comply with PD 5.4.

7.  By 17 August 2015, it was already too late for the defendant’s solicitors to obtain the necessary order to cease to act in time to be dispensed from court attendance on 20 August 2015 given the requirements of Order 67 of the Rules of the High Court. 

8.  Practice Directions are designed, inter alia, to facilitate the smooth functioning of the court system and to ensure a fair hearing.  Where (as is the present case) a party is legally represented, the duty falls on its counsel as well as those instructing him to ensure compliance.

Factual background

9.  The action brought was on a dishonoured cheque.

10.  The parties to the action are Hong Kong companies.  The plaintiff is a well‑known estate agency with offices worldwide.  The defendant became a client of the plaintiff in about the year 2000 and since then the parties have had business dealings concerning various purchases or sales of properties.  Sze Kai Lung (“Mr Sze”) a director of the defendant dealt with Ms Frances Chow (“Ms Chow”), one of the directors of the plaintiff.

11.  The plaintiff’s case is that the cheque was handed over by Mr Sze to Ms Chow on or about 8 January 2014 in settlement of the plaintiff’s invoice dated 1 November 2013 issued pursuant to an agency letter signed by the parties on 2 March 2013 (“the agency letter”). 

12.  The agency letter was confirmation that the plaintiff’s agency fee would be 0.5% of the final purchase price, payable to the plaintiff upon the successful acquisition by the defendant of an industrial property situated in Kwai Chung (“the property”) or of the entire share capital in CRM One Ltd (“the company”) then the sole owner of the property.

13.  Two weeks later, on 15 March 2013, the defendant as purchaser entered into a provisional sale and purchase agreement with Tang Yiu Sing and Metro Rider Investment Ltd (“the vendor”) to acquire the entire issued share capital of the company and the related shareholder’s loan for $700 million with completion fixed for 15 October 2013 (“the provisional agreement”). 

14.  Clause 14 of the provisional agreement provided that within one month thereof, the defendant may request in writing to the vendor to arrange for a short‑term loan of one year for a sum not exceeding $490 million to finance the purchase. Clause 14 also set out the terms of such a loan relating to interest and the security required.

15.  On 18 October 2013, completion of the provisional agreement took place and the defendant became the registered holder of the share capital of the company consisting of one share. 

16.  It is relevant to mention at this point various documents that came into existence contemporaneously with of the provisional agreement. 

17.  On 18 October 2013 the vendor and the defendant entered into what was called the “supplement to provisional agreement” (“the supplemental agreement”).  The recitals show that, on 15 October 2013, the company had charged the property to Full Profit Trading Limited (“Full Profit” or “the mortgagee”) to secure repayment of loans aggregating $211,202,239.78 (“the CRM loan”) made by Full Profit to the company, that the vendor and the defendant had agreed that the CRM loan as secured by the mortgage would continue after completion of the provisional agreement until its maturity, and further that the parties had agreed to vary certain of the financial provisions of Clause 14 by entering into the supplemental agreement for the purposes thereinafter set out.

18.  The operative part of the supplemental agreement contained the vendor’s agreement to procure Full Profit to lend to the defendant $278,797,760.22 (instead of $490 million provided for in Clause 14 of the provisional agreement) to finance part of the acquisition costs on the terms and conditions of a loan letter of even date addressed by Full Profit to and signed by the defendant and Clause 14 of the provisional agreement was to take effect thereafter as varied by the supplemental agreement.

19.  Clause 7 of the loan letter also stipulated for the execution of specific documents by the defendant in favour of Full Profit as continuing security for all the liabilities of the defendant to Full Profit including a second mortgage on House No 31 and House No 32 of Villa Bel‑Air (collectively “the Bel‑Air houses”).

20.  On 1 November 2013, Savills Realty Ltd issued an invoice on behalf of the plaintiff in respect of the fees payable under the agency letter.  On 8 January 2014, the defendant delivered a cheque (post dated to 28 February 2014) to the plaintiff (“the cheque”).

21.  Ms Chow’s evidence is that between those dates, she had personally contacted Mr Sze for settlement on several occasions.  That appears to be common ground as Mr Sze accepted (see §28 of Sze) that he had ‘repeated discussion (sic)’ with Ms Chow in the period preceding the delivery of the cheque regarding settlement of the invoice.

22.  The cheque was not presented for payment until 24 July 2014.  Ms Chow has provided an explanation for the delay in her affirmation but that has been criticised by the defendant as self‑serving.

23.  Be that as it may, the defendant’s case is that at the time the cheque was handed over, it was agreed between Mr Sze and Ms Chow that the defendant would settle the invoice only upon the plaintiff’s full compliance with the oral agreement (set out in §27 below), referred to as the “agreed condition”. 

24.  On 17 June 2014, the government made an offer to the defendant to proceed with the special waiver of restrictions in relation to the use of the property subject to the acceptance of certain conditions that included the written consent of the mortgagee Full Profit.  Although the offer was open for acceptance until 30 June 2014, the mortgagee’s consent was not forthcoming and the offer lapsed.

This appeal

25.  Mr Kok, counsel for the defendant, raised two defences:

(i) Delivery of the cheque was conditional and not for the purpose of transferring the property in the bill.  Accordingly the cheque was not operative nor legally binding as the “agreed condition” was not fulfilled.

(ii) Total failure of consideration.

Conditional delivery

26.  On about 8 February 2013 Ms Chow and her colleague from the plaintiff had accompanied Mr Sze to view the property following which visit the plaintiff was instructed to negotiate the purchase price on behalf of the defendant acting through Mr Sze. 

27.  According to Mr Sze, sometime in February 2013 and before 2 March 2013, he and Ms Chow, respectively acting on behalf of the defendant and the plaintiff, orally agreed as follows (“the oral agreement”):

(I) The defendant would engage the services of the plaintiff in relation to the following (see §7 of the Sze affirmation dated 14 November 2014 summarized below):

(a) The plaintiff would procure for the defendant the purchase of the entire issued share capital and the related shareholder’s loan of the company which was the registered and beneficial sole owner of the property.

(b) The plaintiff would procure the following:

(i) the vendor or its associated company to lend to the defendant a loan equivalent to 70% of the purchase price of the entire issued share capital of the company to finance part of the acquisition costs payable by the defendant for the purchase of the shares (“the loan”);

(ii) the loan would be first secured by a mortgage of the Bel‑Air houses (“the mortgage”); and

(iii) the mortgage would be released one month after the completion of the sale and purchase of the shares of company and thereafter be substituted by a mortgage of the property to secure the outstanding loan.

(c) The plaintiff would procure the mortgagee of the property to do any other things in the capacity of mortgagee of the property as required by the Lands Department in a reasonable and timely manner to facilitate the approval of the Special Waiver Application.

(II) In return for the plaintiff’s services (set out in (I)), the defendant would pay the plaintiff a fee equivalent to 0.5% of the final purchase price of the shares of the company (see §8). 

28.  On its face, the cheque constitutes a contract for unconditional payment.  The defendant contended that this case falls with an exception to the general rule such that extrinsic evidence is admissible to prove that the terms of the contract differed from those expressed in writing on the cheque. It was said that delivery of the cheque was conditional or for a special purpose within section 21(2)(b) of the Bills of Exchange Ordinance. 

29.  According to Mr Sze, the cheque was handed over to Ms Chow sometime in late December 2013 or early January 2014 and it was orally agreed at the time that the defendant would settle the invoice only upon full compliance by the plaintiff with the terms of the oral agreement.  On that basis, it was submitted that the cheque itself did not show all the terms of the agreement and oral evidence was admissible to establish all its terms.

30.  It is well settled that since contracts of the parties to a bill or note must be in writing, extrinsic evidence is in principle excluded by the operation of the parol evidence rule.  To admit extrinsic evidence “would undermine the certainty and finality which ought to attach to each party’s promise on the instrument”: see Chalmers and Guest on Bills of Exchange and Cheques,17^th Edn, at §2‑155.

31.  What the defendant is seeking to do is to qualify its absolute undertaking on the cheque by adducing evidence of the alleged contemporaneous oral agreement in defeasance of that undertaking.  In such cases, parol evidence is inadmissible: see for example Lam Tai Kwan v Lo Wai Kit [2007] 1 HKLRD 367 at §§10‑11 where the rule and its rationale were considered.

32.  Mr Kok relied on the decision of Recorder Yuen SC in Phoneyork Co Ltd v Chesson International (Holdings) Ltd and Anor, HCA 2192/2007, unreported, 28 May 2012 for the admissibility of extrinsic evidence.  But as the learned recorder in that case remarked at the outset of his judgment, Phoneyork is an “unusual case”.  As will become apparent, it is plainly distinguishable. 

33.  While the cheque in Phoneyork was given by the defendant upon the signing of an undated sale and purchase agreement, there was a contemporaneous explanatory memorandum dated 29 September 2007 signed by Mr Choi of the third‑party the estate agent acting for the defendant and by the secretary of Mr Kai, the defendant’s owner who were present to the effect, inter alia, that the cheque was only to be used and valid for the sale of the building identified in the sale and purchase agreement at the asking price and would not be passed to the plaintiff until Mr Kai had had a chance to meet with the plaintiff to discuss the price and if the transaction were not successful after 30 days the cheque was to be returned.  Further, at Mr Kai’s request made several days later, his estate agent made an endorsement on the back of the cheque to similar effect.

34.  It will be seen that the facts of Phoneyork were somewhat unique.  I do not agree that it assists the defendant or that the extrinsic evidence is admissible on the facts of the present case.  Other than the unsubstantiated assertions made by Mr Sze, it is to be noted that there is not a shred of evidence (contemporaneous or otherwise) in support in the papers before the court. 

35.  Notably, no suggestion of there being an oral agreement (much less its terms) surfaced until after the commencement of this action.  That is notwithstanding the invoice and two subsequent reminders having been issued to the defendant. 

36.  Even assuming (contrary to my view) that extrinsic evidence were admissible and the parol evidence rule does not apply, the court has to be satisfied that credible triable issues have been made out and that the defence is inherently probable.

37.  As I understand it, the condition upon which it was said the cheque was delivered was compliance with the agreed condition by the plaintiff.  On the defendant’s case, the oral agreement would have been made at a point in time when negotiations for the acquisition of the property had not yet concluded. Necessarily, the terms would still be at large.  One might ask rhetorically what estate agent would enter into an agreement to undertake to procure the matters stated in §27(I)(b) above at a time when the terms of the transaction were yet to be finalised and agreed.  That aside, the oral agreement appeared to involve the provision of services (which on any view were onerous) well beyond the usual scope of services normally rendered by estate agents for no additional remuneration.

38.  Mr Sze/the defendant is not a novice in property transactions given that the defendant had been the plaintiff’s client for about 12 years at the time the plaintiff was formally retained to act as the defendant’s agent for the acquisition of the share capital of the entity owning the property.  The agency fee of 0.5% of the purchase price is nothing out of the ordinary for a transaction for the sale and purchase of property.  In any event, there is no evidence before the court that suggests otherwise.

39.  The defendant’s case is premised on a scenario involving the property agent providing not only the normal services expected of estate agents but also undertaking to procure that:

(1) the vendor or “its associated company” (which was unidentified) would make a loan equivalent to 70% of the purchase price to the purchaser;

(2) such loan would be secured by a mortgage of specified properties of unknown value;

(3) the mortgage would be released within a month of completion and the mortgagee (be it the vendor or its associated company) would accept the substitution of a mortgage of the property instead to secure the outstanding loan; and

(4) the mortgagee (in that capacity) would facilitate the approval of an application (yet) to be made by the defendant to the government for a special waiver of restrictions affecting the user of the property in a reasonable and timely manner. 

40.  The services the plaintiff is alleged to have agreed to provide by the oral agreement go far beyond the typical or usual services provided by estate agents.  In other words, the arrangement asserted by Mr Sze would mean that the agreed fee of 0.5% was an “all‑in” fee with no extra remuneration for the additional services and that the defendant, being a seasoned investor, was content to sign the agency letter that made no mention of what, on the defendant’s case, was the key element of the transaction (see §48 below).

41.  Further, the additional services described in §§27(I)(b)(iii) and 27(II) could not realistically be performed except by a party who is in a position to influence or assert ‘leverage’ over the vendor as well as the unidentified mortgagee.  It is nowhere suggested (and there is no evidence to demonstrate) that the plaintiff was in such a position.

42.  Further, it is common ground that each of the vendor, the defendant and the mortgagee was legally represented.  While the precise date when each retained its legal advisers is not known, counsel did not demur from the court’s observations that the legal documents involved including the provisional agreement, the supplemental agreement, the loan letter and the second mortgage of the Bel‑Air houses were professionally drawn and it was the court’s understanding that the vendor, the defendant and the mortgagee were legally represented by the time of the provisional agreement was signed.  It is worth highlighting that while the loan letter required a second mortgage of the Bel‑Air houses (Clause 7(b)) it is silent as to its release and substitution of the property to secure the loan.

43.  In my view, it defies belief that the defendant would not have conveyed the terms of the oral agreement to its solicitors.  Had it done so, undoubtedly, the issue concerning the oral agreement would have been raised.  But that did not happen.

44.  Further, there is no evidence to suggest that the plaintiff had any substantive involvement once solicitors had been instructed to handle the transaction.  The fact that the plaintiff did relay e‑mail messages relating to the special waiver application some 15 months after the provisional agreement does not take matters further.

45.  In conclusion, I consider the defence of conditional delivery to be but pure “moonshine”.

Total failure of consideration

46.  As this defence hinges on the admissibility of extrinsic evidence, it does not require further consideration if, as I have held, the parol evidence rule applies.  Even if extrinsic evidence were admissible, the defence is not arguable.

47.  The defence was run on the basis of total failure of consideration.  Under the terms of the oral agreement it was said that the plaintiff had failed to discharge two of the conditions under §27 above, namely, the release of the mortgage and procuring the mortgagee to facilitate the approval of the special waiver application (§§27(I)(b)(iii) and 27(II).

48.  It was said that the fundamental basis of the transaction was government approval for conversion of user of the industrial building.  It was said that from the defendant’s viewpoint, obtaining government approval was the key to the whole project. The defendant’s case is on total failure of consideration was that absent government approval acquisition of the company was of no value to the defendant.

49.  That submission was countered by Mr Ngai, counsel for the plaintiff, who drew attention to §25 of Sze which reads:

“By 30 June 2014, Full Profit had failed to confirm by signing on the Special Waiver Document that it raised no objection to the terms, conditions and covenants imposed by the Government on the Company in relation to the Special Waiver Application. As a result, the Special Waiver Application could not be approved by the Government by 30 June 2014. With lots of effort, the Company was subsequently able to obtain an extension on the deadline to 20 October 2014 from the Government. Be that as it may, due to the delay in obtaining the special waiver of the restrictions in relation to the use of the Property, the Company’s initial project for the conversion of the use of the building on the Property was disrupted and/or delayed, and an additional costs (substantially as finance costs) was incurred as a result of the disruption/delay.”

50.  It is clear that the mortgagee’s refusal to co‑operate in June 2014 did not result in the project coming to naught.  The consequence was that the project was disrupted and/or delayed and the defendant had to incur further expense.  Implicit from the passage set out above is that approval was eventually obtained.  There is also no suggestion that government was persuaded to drop its requirement of the mortgagee’s written consent.

51.  In that connection, it is relevant to note from the June 2014 correspondence exchanged between the defendant’s and mortgagee’s solicitors concerning the special waiver application that the mortgagee’s refusal to give consent was not unconnected with the defendant being in default with its interest payments under the second mortgage at that time, causing the mortgagee to call in the outstanding loan.

52.  In my view, the failure of consideration defence is equally hopeless.